Taxpayers face a £100 million bill from City lawyers and bankers for the failed auction of Northern Rock, it emerged last night, as staff at the bank were bracing themselves for sweeping job losses and branch closures.

Rival banks, investors and hedge funds all went on the warpath in protest at the Government’s decision to nationalise the Newcastle-based bank, threatening to drag the issue out further in costly legal battles.

Ministers conceded that the publicly-held bank would have to be heavily scaled down in order to meet EU competition rules.

Ron Sandler, the bank’s new boss, said that he did not intend to run the bank down “to extinction”. But his new business plan, to be presented to Brussels on March 17, is not expected to include competitive interest rates which were once Northern Rock’s hallmark. The bank will also be forced to limit itself to its existing markets.

The costs of the five-month delay in resolving Northern Rock’s future began to emerge yesterday. Goldman Sachs, the investment bank, and Slaughter & May, the legal firm, stand to share between £15 million and £20 million for advising the Treasury on the sale.

Northern Rock – and therefore the taxpayer – is also set to pay its bankers at Blackstone, Citigroup and Merrill Lynch, and its lawyers Allen & Overy and Freshfield Bruckhaus Deringer, about £75 million in fees, including a £25 million success fee.

Sir Richard Branson’s consortium and a management team that also bid for the bank will each receive £5 million from the Treasury to cover part of their costs. There was also the prospect of further legal bills for the public purse.

Representatives of some of Britain’s high street banks have approached the Competition Commission over fears that a state-aided Northern Rock would undercut their mortgage and savings rates. The British Bankers’ Association has asked the Government for clarification on how aggressively the bank would be permitted to fight for business.

Angela Knight, the BBA’s chief executive, said: “We need some sort of definitive statement on the public record that they are not going to operate Northern Rock in a way that is anti-competitive.”

A source at one of Britain’s largest banks said: “Having a mortgage competitor that is state-subsidised is a problem.”

Banks fear that its government backing would allow the Rock to borrow more cheaply from other banks and use the cash to offer attractive rates on its mortgages and savings accounts.

Northern Rock’s biggest shareholder has hired one of London’s leading QCs to advise it on a legal challenge after both the Chancellor and the Prime Minister said that the bank would be run commercially.

The Government faces a law suit from SRM Global, the Monaco-based hedge fund that owns more than 10 per cent of the Rock, is understood to have hired litigators at White & Case, one of the Wall Street’s largest international law firms. It has taken on one QC expert in financial and regulatory law and it is thought that another top QC will follow shortly.

SRM wants the Government to offer at least 400p per share in compensation for the loss of its investment in Northern Rock when the bank went into public hands.

Gordon Brown insisted that Mr Sandler would be given a free hand to restructure the bank in the way he thought best. Alistair Darling said that Northern Rock would not be discouraged from repossessing homes belonging to people who fell behind with their mortgages. “They will be treated no differently from people with mortgages with other banks,” he said.

Jonathan Todd, a European Commission spokesman, said that in order to have its state aid waved through, there was normally “a reduction in capacity” at nationalised companies. The two other private bids would also have involved some “shrinkage”.

The prospect of job losses, closures and a bank owned by the Government repossessing homes was an obvious worry to Labour MPs, particularly those in the North-East, as ministers accepted that they would have to fight the election with the bank still in the public sector. “Whether it will be our albatross no one can tell,” one said.

Mr Sandler, on a visit to the bank’s headquarters in Newcastle, said that it would take years for the bank to pay back its loans from the taxpayer. “It is clearly unrealistic to talk about months,” he said. “We are clearly talking about a period of some years.”

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